Most people generally overweight the value of income tax savings form buying a home. The amount of savings depends on two factors: the amount of money you borrow and the tax bracket in which you are in. It is also important to note that only the amount that exceeds your standard deduction ($5,800 if single or $11,600 if married filing joint) will reduce your taxes. This is why this deduction is more favorable to high income earners if they finance an expensive property. Beware of tax accountants, real estate agents, and mortgage brokers who advise you to buy a bigger house. If you decide to purchase a larger home, you should have reasons that are far more important than taxes.
The Tax Policy Center blog writes, “A new analysis by my Tax Policy Center colleagues Ridathi Chakravarti and Dan Baneman finds that most taxpayers would barely notice the change in their tax bill even if Congress dramatically restructured the subsidy. And with some changes, many of us would end up paying lower taxes than we do today.
“In the unlikely event Congress simply repeals the mortgage deduction, the average tax bill would increase by $710. But those who earn between $30,000 and $40,000 would pay an average of about $70 more while those making more than $1 million would pay an additional $4,000.“
It is certainly possible that policies regarding real estate related deductions will change in the next few years. With large budget deficits mounting, mortgage interest deductions could be targeted by Congress to make up for the shortfalls. If things do not change, definitely take advantage of it. But, never put yourself in a situation in which you are banking on a tax policy.